Securities and Exchange Board of India (SEBI) has amended its regulations to allow startup founders—classified as promoters—to retain Employee Stock Option Plans (ESOPs) and similar share-based benefits granted at least one year prior to filing for an Initial Public Offering (IPO).
SEBI amended the ESOP rules to address long-standing concerns about their treatment during the IPO process.
This change will to smoothen the path for startups preparing to go public.
Previously, SEBI regulations barred promoters from holding or being granted ESOPs.
Founders who held such benefits were required to liquidate them before submitting the Draft Red Herring Prospectus (DRHP), a rule that many in the startup community viewed as restrictive and counterproductive.
What the Amendment Allows
SEBI’s notification now allows any company to let employees identified as promoters or part of the promoter group in its draft offer document hold and exercise ESOPs, Stock Appreciation Rights (SARs), or other share-based benefits—if the company granted these at least one year before filing the draft IPO papers.
Startup founders can now retain the equity-linked incentives they received before initiating IPO preparations, as regulators no longer require them to surrender those benefits.
The rule change applies to all forms of share-based compensation issued under employee benefit schemes, including SARs and sweat equity.
SEBI Addressing Legal Ambiguity and Reverse Flipping
The amendment also resolves a legal ambiguity that had emerged between SEBI’s Share Based Employee Benefits and Sweat Equity Regulations, 2021, and the Companies (Share Capital and Debentures) Rules.
While the latter allowed startups up to 10 years old to issue ESOPs to promoters, SEBI’s rules required liquidation of such benefits before IPO filing.
This contradiction created confusion and compliance challenges for companies in transition.
The new rule is particularly beneficial for startups undergoing “reverse flipping”—a process where companies shift their legal domicile from overseas jurisdictions back to India before listing.
Founders in such companies often faced dilution of ownership and loss of performance-linked incentives due to regulatory constraints.
SEBI’s amendment now offers clarity and continuity in such cases.
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